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hudebnik

How to keep people in the insurance market

Of course, the simplest way to have a large, reasonably healthy pool of people paying for health insurance is to have EVERYBODY paying for health insurance -- universal enrollment. But socialism, totalitarianism, Hitler, dark days of the war, Kenya, end of civilization as we know it. So never mind that.

People do cost/benefit calculations. For any given person, under any given life circumstances, there's a cost C of buying insurance, and a benefit (financial, psychological, etc.) B from having health insurance. It makes sense for you to buy health insurance if B > C.

What are the units of B and C? They're really about personal choices, so they have to be measured in what economists call "utility": one scenario has more utility than another if you would choose the former over the latter. It's tempting to measure them in dollars, but in fact any given number of dollars has more utility (it matters more in decision-making) to a poor person than to a rich person, so anything measured concretely in dollars will have utility that's a decreasing function of income.

Furthermore, poor people tend to be liquidity-constrained: even if they know something would be a good long-term investment, they're less likely to make that investment if it means being unable to pay the rent or buy food this month. In other words, they necessarily discount the future more heavily than rich people do; while everybody values a predictable dollar now or soon over a hypothetical future dollar, this effect is more pronounced for poor people. C is typically stated in concrete, predictable dollars/year, while B is partly hypothetical dollars and partly psychological; for both of these reasons, C is effectively a decreasing function of income. (At the very-rich level, B decreases with income too: if you could just write a check for a course of chemotherapy, you don't need health insurance. Let's leave the very-rich -- perhaps the top 1% of the income distribution -- out of this analysis.)

B is also an increasing function of health risk: the older and/or sicker you are, the more valuable health insurance is to you.

In the U.S., it's always been possible to buy insurance at different levels, ranging from cheap, bare-bones plans (B and C both small) to expensive, comprehensive plans (B and C both large). In other words, B and C are increasing functions of coverage; one assumes a given customer will choose a coverage level (possibly zero) to maximize B relative to C. If even the cheapest plan available costs more than it's worth to you, you'll choose no coverage at all.

So, to sum this up: regardless of the legal environment, B will be an increasing function of age, coverage, and sickness, while C is increasing in coverage and decreasing in income. Which means in general, health insurance makes more sense for old, sick, and rich people.

Laws about health care are intended to tweak the shapes of these curves. For example, a system of pure universal coverage removes the "no coverage at all" option, and indeed removes the notion of coverage level entirely, as everybody gets the same coverage (which is more valuable to you the older and sicker you are). In a pure laissez-faire system, C tends to be not only increasing in coverage and decreasing in income but increasing in age and sickness, essentially infinite for people with pre-existing conditions whom nobody wants to insure at all. Medicare was put in place to limit how high C can go at the high-age end, so old people (or moderately-old with long-term health problems) were more likely to have health insurance; their higher actuarial costs were shared by taxpayers so the insurance market didn't buckle under their weight. Medicaid was put in place to limit how high C (measured in utility) can go at the low-income end, so really-poor people were more likely to have health insurance.

Obamacare made several changes to this. It expanded Medicaid to apply to somewhat higher income levels as well as the poorest, making moderately-poor people more likely to have health insurance. It provided subsidies for people just above that level, making middle-income people more likely to have health insurance. It required insurers to cover already-sick people, at a cost not enormously higher than the cost for healthy people, getting rid of that vertical asymptote. And it removed the most "bare-bones" plans from the system entirely -- if your coverage doesn't meet certain minimum standards, your coverage is zero -- so below a certain level of coverage, B is zero, while C is the nonzero penalty P for being uninsured. The penalty is still less than the cost of buying insurance, so some liquidity-constrained people will still "choose" to be uninsured, but again the effect should be to make poor people more likely to have health insurance.

In particular, if you currently have health insurance and are contemplating dropping it, you know that you'll lose all your benefits B, but will save only C - P on costs, which makes you less likely to drop it. If you're currently uninsured and are contemplating entering the market, the reverse applies: you'll get benefits B, at a cost of only C - P. The larger P is, the more likely people are to stay insured, or become insured if they're not. Which is why one of the Republicans' first tactics in pushing Obamacare off a cliff was to reduce P.

Ryan/Trumpcare takes a different approach. There's no penalty for being uninsured, but there's a penalty of 30% of your first year's premiums for rejoining the market after being uninsured. So if you currently have health insurance and are contemplating dropping it, you know that you'll lose all your benefits B, while saving C immediately; if you rejoin the market later, you'll pay 0.3C for one year, but that's farther in the future so liquidity-constrained people will discount it more. In other words, poor people are more likely to drop out of the insurance market if they're in it, unless they're old enough or sick enough that B is still greater than C. If you're currently uninsured and are contemplating entering the market, you know that you'll gain B, while paying 1.3C immediately and C in the long run. The longer you go uncovered, the more money you save before paying that one-time 0.3C for a year to re-enter the market. In other words, those who re-enter the insurance market after a lapse will be those old enough and sick enough right now that B > 1.3C, and sufficiently liquid that they can handle the one-time penalty. So at both ends of a lapse, Ryan/Trumpcare encourages younger, healthier, and poorer people to go uncovered, leaving an older, sicker, richer pool of people in the system and inevitably higher average premiums. Pushing Obamacare off a cliff wasn't enough; they're pushing their own system off the cliff even harder.

At the same time, Ryan/Trumpcare decreases government cost-sharing and subsidies, making poor people less likely to participate in the system unless they're really sick. It makes those subsidies age-based rather than income-based; this brings a small advantage in reduced paperwork, but tends to encourage younger people to go uninsured unless they're really sick. At the same time, it increases what insurers can charge old people, thus encouraging old people to go uninsured unless they're really sick. (If you're sufficiently old, you can discount the one-time penalty to re-enter the market because you'll probably die before paying it.) And it largely dismantles the minimum standards of Obamacare -- the "bronze", "silver", "gold", and "platinum" levels -- effective 2019, thus encouraging people to buy cheaper coverage than is currently possible without a penalty, until and unless they get really sick. All in all, it gives us an insurance system for middle-aged people (probably near their earning peaks), fairly-rich people, and really sick people of all ages -- a recipe for skyrocketing premiums.